Cigars Fend Off Challengers

Cigars remain a popular c-store category, but like other tobacco products, are targeted by taxes, community bans and age restrictions pushed by state and local legislators.

By Howard Riell, Associate Editor

According to market research firm Information Resources Inc. (IRI), convenience store sales of cigars totaled $2.9 billion for the 52-week period ending June 11, 2017, a 10.7% increase over the corresponding year.

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Savvy c-store operators continue to do well with smaller, less expensive cigars by maintaining strong sets, using promotions, knowing what consumers want and remaining confident that the popularity from consumers will continue.

“The U.S. cigars and cigarillos category remained highly concentrated in 2016, with the leading four players together accounting for a 78% share of volume sales,” said Eric Penicka, a research analyst at Euromonitor International. However, public smoking bans across the country may have an adverse impact on demand for cigars as it becomes increasingly difficult and inconvenient to smoke them, he added.

“It is more likely that these bans, which are being extended to outdoor public areas like beaches and parks, will have a strong negative impact on mass-market cigars,” said Penicka.

“Many of the public smoking bans include exemptions for tobacconists and cigar bars, which are mostly frequented by enthusiasts who prefer premium cigars.”

The impact that taxes, bans and restrictions have on cigar sales are often difficult to measure. The effect of a flavor ban can prove devastating for retailers that bump against another jurisdiction that does not have a ban. The same goes for taxes. In some markets, such as Cook County, Ill., which has much higher taxes than surrounding counties, the levies hurt law-abiding retailers at the same time others procure product from outside the county.

“Selling is the concern,” said Amer Hawatmeh, president of St. George Oil Inc. in St. Louis, Mo., “and the fact that the industry is allowing government to determine their fate in a product and business they created is crazy.”

Tax hikes certainly impact sales, of course, but not necessarily permanently.

“Here in Utah we’re kind of behind on the tax scene,” said Randy Needs, director of marketing for Holiday Oil Co., based in Salt Lake City. “About five years ago we were not really taxing our customers. The state wasn’t given that revenue that other states were getting, so they kind of stepped up to the market.”

The rise of Utah’s tax rate, which Needs characterized as gradual, seriously hurt cigarette sales for about a year, he continued. “They have gone up, but not anything large. But customers kind of became numb to it and growth came back, and I think the same thing happens with cigars, and now with e-cigarettes. Everybody kind of gets numb to it and they go back to their normal way.”

The first and most direct step a retailer can take is to fight against any ban or tax increase. This can be accomplished using their state retail association, and by sending letters to their representatives.

Hawatmeh is convinced that a petition should go out with the signature of every employee, manager and owner in the industry. “It would have millions of names sent to the regulatory (agencies) and White House. It would show that we the people have spoken.”

More conventional steps, of course, should also be taken. A retailer in proximity to a market without these types of bans or taxes needs to create a point of difference to encourage consumers to shop at their stores. Increasing, and advertising, a large assortment or manufacturer specials will also improve the perception that the retailer is a destination for cigar purchases.

Another strategy is investing in or advertising a beer cave or a pizza program, which can attract customers who are more likely to also purchase cigars. Some retailers can also promote their cigars bundling them with another purchase in many cases. Eventually, said a top industry executive, this practice, along with other promotions, will likely be banned by the U.S. Food and Drug Administration, as has already occurred in some instances.

Holiday Oil, which operates 56 convenience stores throughout Utah, ultimately decided to go with a cigar set consisting of three brands: Altria’s Black & Mild, Swisher and Prime Time. Each offers a strong promotional program. “Prime Time has single-stick shippers; little countertop units for cigars priced at 59 cents per stick. They’ve got four flavors, and we purchase and promote those pretty regularly.”

At the same time, he continued, Swisher has put a major emphasis on the two-pack foils, supported once again by a promotional strategy.

“We buy into some of those counter-top two-pack promotions,” said Needs. “That’s where Swisher is going—not the singles, but really driving more of the two-packs, and so there is great growth there. Of course, it is a different cigar than Prime Time.” Needs reported that Black & Mild is easing up on its emphasis on the 99-cent price point. “For a good year they were promoting 99 cents, and of course they were introducing a bunch of seasonal flavors, as well.”

The packaging of cigars is finding a wider consumer acceptance.

“I think that’s really the biggest thing manufacturers have spread out into those categories,” said Needs. “In our market, Prime Time has always been the dominant cigar/cigarette product. We have seen Swisher and Altria, with the Black & Mild brand, really make a push into that single-stick market. That has expanded the business.”

A broadening of the offerings has been just what consumers are looking for, Needs continued.

“Obviously there are more varieties; Altria’s Black & Mild cigars have plastic and wood tips, so they are a little bit more upscale. Swisher Sweets has got some flavors that I think a probably a little bit bolder than some of the Prime Times, so those things have expanded the market all together. We still do well with some of the 10- and 20-packs from Prime Time; they have always been stable, nothing great. But the singles have really proliferated and made that category real interesting.”

All told, Holiday is doing well with its cigar set, which includes about 60 SKUs. Last year saw sales rise by 25-26%, said Needs, who handles the buying chores for all of Holiday’s product categories.

“We were probably under-categorized in that category going into 2016. But with the extensions of some of those lines from some of those manufacturers we went back in and redid our sets, expanded them, made them more of a destination store for that product,” said Needs. “And we saw some great growth from that.”